Black market fears over tax plans

Construction labour suppliers are warning that government plans to reduce self-employment will force workers on to the black market and put contractors out of business.

Tax chiefs want to shift 300,000 construction workers out of self-employment and back onto PAYE in a bid to raise an extra £350m a year.

Officials at the Treasury and HM Revenue & Customs believe nearly 40% of the country's 780,000 subcontractors operating as sole traders are falsely self-employed.

David Jackson, managing director of payroll specialist Hudson Contract Services, said: "The burden on the construction industry at a time of severe recessionary pressures will be to increase costs and eliminate the more productive sector of the workforce. How many construction companies can stand that?

"There are currently 500,000 operatives who exercise their right to work on a self-employed basis. They don't want state benefits, and take what they can negotiate in good times and bad. This proposal will drive them to work abroad, on the black market, or out of the industry altogether."

The Treasury and HMRC started a consultation exercise last week which will put the onus on construction workers to prove they are legitimately self-employed or face going back on the books.

Rows over employment status are currently sorted out by referring to a complicated library of case law.

The government's proposed approach is for new 'deeming' rules under which workers will automatically be paid via PAYE unless they satisfy one or more of the following criteria:

• They provide plant and equipment required for the job
• They provide all materials required to complete a job
• They provide other workers and are responsible for paying them

Analysis of the most recent set of tax returns shows 300,000 subcontractors did not claim deductions for the cost of materials, plant or equipment.

Industry experts believe the move will increase labour costs by more than 10% as employers are forced to pay National Insurance Contributions. Workers will also end up with less in their pay packets.

The consultation document states: "The proposal may increase the cost of labour to construction firms, resulting in either an increase in pre-tax wages or a decrease in post-tax wages."

The move is the latest in a series of government attempts to stamp-out false self employment (see box).

Previous efforts have floundered, leaving contractors with directly-employed workforces facing higher overheads than competitors using self-employed workers.

The document states: "This proposal will restore a level playing field for those businesses that are complying fully with their responsibilities.

"They will no longer be undercut by those who, up until now, have not chosen to comply."

The proposals also include plans to clamp-down on intermediary companies that widely advertise their services to cut tax costs for workers and employers.

No time frame has been set for the clampdown because the government "recognises the effect that the economic downturn has had on the construction industry and intends that the measures developed as a result of this consultation will take effect when the industry is in a stronger position".

One industry expert said: "Of course people should pay the proper tax, but the construction industry has been a special case for years so you can't just turn round and change the game overnight - particularly when things are so grim economically."

SELF-EMPLOYMENT - A HISTORY OF FAILURE

• 1997 - the then Contributions Agency and Inland Revenue granted a moratorium on wrongly classified workers. Firms that promised to take workers back on the books who were previously working falsely under self-employment terms were granted an amnesty from previously underpaid tax and National Insurance. Around 180,000 construction workers moved into direct employment as a result but gradually moved back in the following few years.
• 2004/05 - The Inland Revenue decided to deal with the problem by beefing-up its compliance unit in new teams focusing on construction. The initiative failed.
• 2004/06 - The Revenue encouraged compliance by sending targeted letters to contractors reminding them of their responsibilities to check employment status. It resulted in a "limited positive impact".
• 2007 - Contractors asked to confirm in declarations included in the new CIS return that they were checking the employment status of workers. Led many contractors to protect their position by engaging workers through intermediary companies.
• 2009 - Government changes approach and now believes "legislation to deem income received by workers in the construction industry to be employment income is the best way to tackle this problem".